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USD to CAD Update: After a choppy start to October, where is the Canadian dollar going from here?

So far October has been very volatile for the USD to CAD exchange rate.  In just the first four trading days of the month, the value of USD has gyrated in different directions each day and has traded as high as 1.277 CAD and as low as 1.255 CAD.  We have described the Canadian dollar as being caught between two opposing forces; surging energy prices (good for CAD) and rising US treasury yields (good for USD).  Today, oil is down modestly after hitting its highest levels since 2014 yesterday.  At the same time, the yield on the US 10-year treasuries is creeping up again and nearing last week’s high of 1.55%.  That has caused stocks to give up some of yesterday’s significant gains, and unsurprisingly, the Canadian dollar is down a bit.  USD to CAD is currently at at 1.261 (CAD to USD is at 0.793).  Ironically for the Canadian dollar, higher energy prices are partially contributing to higher US yields.  This is because as higher energy prices exacerbate fears of inflation, there is increasing pressure for the US Federal Reserve to move to rein in monetary policy, which in turn is why yields are moving up in the first place.  So, what happens to the Canadian dollar now?  Neither higher energy prices nor higher yields are going away any time soon.  But in our view, energy prices will soon stabilize at these high levels while US yields will continue creeping up given the impending Fed action in November.  As such, in the short-term, we see the US dollar as more likely to rise in value against the Canadian dollar.

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